As late as 1980, almost half of all private-sector employers had an employer-sponsored pension plan, according to the Georgetown University Law Center. By 2006, that number had decreased to lower than one in four private-sector workers.
Research shows that pensions are one of the best ways to guarantee a secure retirement. Why, then, has the private sector largely abandoned them over the past few decades?
The answer lies with unintended repercussions on tax policy and corporate greed at the expense of workers.
Private-sector pensions have existed in the United States since American Express became the first corporation to offer one to its employees in 1875. Their use skyrocketed in the first two to three decades immediately following World War II; during this time, “at one point, 88 percent of private-sector workers, who had a workplace retirement plan, had a pension.”
This changed with one slight tweak to the tax code that became highly damaging to workers’ retirement security.
In 1978, Congress passed the Revenue Act, which created the modern-day defined contribution plan known as the 401(k).
401(k)s were originally designed as a way for wealthier people to save money on their taxes. However, major corporations (encouraged by friendly rules from the Internal Revenue Service in the 1980s on regulating 401(k) plans) soon realized that they could save money by offering their employees a defined contribution plan instead of a defined benefit plan.
Following the passage of 1978’s Revenue Act, 401(k)s soared in the private-sector over the following decades. As of 2018, more than 58 million Americans participate in a 401(k).
The creators of the 401(k) never designed them to be the main retirement vehicle for Americans and their widespread adoption has been disastrous for workers. Last October, we highlighted that, according to Fidelity Investments, the median amount in its 401(k) accounts is a paltry $24,500. This is woefully inadequate for a secure retirement.
Meanwhile, major corporations used the money they saved skimping on their workers’ retirements to fund exorbitant salaries for their CEOs (CEO compensation has ballooned by 940 percent since 1978) and to buy back trillions of dollars worth of stock in their own companies.
In the public sector, however, it’s a different story, as most public employees still have access to a defined benefit pension plan. These pensions are a necessary asset because they help employers recruit and retain employees, offer a way for employees to retire at a cheaper cost than 401(k)s, and collectively pool risk among their members, meaning they do not place all of the investment risks for retirement on individuals like 401(k)s do.
Policymakers would be wise to heed the lessons of the private sector’s use of the 401(k) and protect pensions for public employees.
